USD Vol: Illiquid and sticky, but overall lower

Illiquid and sticky, but overall lower

Treasuries rallied further today, with the back end leading in a bull flattening move of up to 7bps drop. The vol surface is lower, with 3m to 1y expiries down around 1 to 2 normals on the day. A source noted that yesterday post-Powell “vols came down hard” while today - although seeing more selling - vols, especially in the ULC still feel “sticky” with the sector not seeing as much selling comparatively. “Dealers are likely short the ULC,” the trader explained.

Meanwhile, liquidity remains an issue, sources say, with, for example, a "decent" bid in the ULC not seeing any counters and the market extremely quiet this morning in Asia and European time. "I usually see some markets from Asia and Europe at the start, but today there was none," a source highlighted.  

Interbank activity today saw 1y1y trade at 113bps and was offered at 112.5bps last, 1m10y traded at 251bps and then 247bps, 1y10y traded at 817bps and 3y30y traded as low as 2373bps and then up at 2377bps and 2380bps. In longer expiries 3y7y dealt at 974bps and 5y5y dealt at 863bps and 4y30y traded recently at 2596bps, according to the SDR and sources.

Elsewhere, the 5y 0% floor saw a market of 52/62bps, after trading a couple days ago at 52bps, and 1x2 1y1y wedge was last quoted at 29.5bps/32.5bps, according to sources. 

In skew, 5y10y 100bp each way risk reversals may have traded at 72bps, after being offered at 76bps earlier this week, sources say. 6m10y 100bps each way dealt at +20bps and 1m30y 50bps each way dealt at +25bps, sources say.  For more, please see SDR trades.

IR and FX vol recap; Soft landing vol supportive – Deutsche  

Analysts at Deutsche look at the dynamics of the vol surface this year along with interplay of FX vol. The beginning of rate hikes “led to predictable outperformance of the ULC as it became clear early on that the Fed would be moving in bigger steps” but then “resilience of inflation to initial hikes created a mini panic episode in early June.”

Deutsche notes that this resulted in “a major repricing “of the ULC “with dispersion between different vols exceeding 60bp” – as vol rose across the surface, the ULC “reached crisis levels above 180bp.” As it “became clear that 75bp would become a norm and that the rise of real rates would become the objective to reach into the restrictive territory…this triggered the spike of the FX vol” and “the intensity of real rates rise became the main driver which overpowered everything else and both volatility and risk assets developed tight correlations with them.”

Then, “as the real rates rise slowed down and the real curve inverted with more rate hikes administered, there was more information about the possible duration and intensity of the tightening cycle” and the discourse “shifted towards the policy turnaround and the risk premium reflected in the vol surface began to move from the actual interpretation of the aggressive rates path to its consequences,” Deutsche highlights.

“The convergence of the surface started in mid-September with the largest decline in the upper left corner, while long-tenors continued to be well supported” and “compared to their peak levels, the upper left corner is down by 40bp, while the right side is only 10-20bp lower” and “the dispersion between the key points on the surface is within 20bp,” it notes.

However, Deutsche points out that “FX vol still remains the best performer, only 1% below its highs” and “as more uncertainty gets resolved, volatility should decline further” with the actual levels where it is expected to settle “a function of the details of the end point”:

“If we are indeed heading towards a recession, a soft landing is likely to be more supportive for vol as the Fed is likely to remain hawkish and not cut too fast and too much. A deep recession, however, could be bearish for vol if it requires aggressive rate cuts and a protracted period of recovery.”

New structured notes

For a complete review of USD MTN activity over the past week, please see  USD MTNs.

• IADB sold a $50m 15y NC6 zero coupon callable (non-Formosa). The EMTN matures Dec 2037 and is callable annually starting Dec 2028. Lead JPM. Estimated IRR 4.62%. Announced Dec 1.

   

• ANZ Banking sold a $50m 15y NC5 zero coupon callable (non-Formosa). The EMTN matures Dec 2037 and is callable in 5ys starting Dec 2027. Self-led. Estimated IRR 5.2%. Announced Dec 1.

   

• Goldman Sachs is working on a self-led floating callable maturing Dec 2027 NC1 that pays 2y SOFR flat. EMTN.

   

• Credit Suisse London is working on a fixed callable via Fifth Third maturing Mar 2024 NC3m that pays 7%. Domestic MTN.

   

• Royal Bank of Canada is working on a self-led fixed callable maturing Dec 2027 NC2 that pays 5.65%. GMTN.

   

• Royal Bank of Canada is working on a self-led fixed callable maturing Dec 2032 NC2 that pays 6%. GMTN.

   

• Royal Bank of Canada is working on a self-led fixed callable maturing Dec 2025 NC1 that pays 5.5%. GMTN.

   

• Royal Bank of Canada is working on a self-led fixed callable maturing Jan 2024 NC6m that pays 5.35%. GMTN.

   

• Bank of Montreal is working on a self-led fixed callable maturing Dec 2027 NC6m that pays 5%. GMTN.